Life insurance, in its purest form, provides a death benefit for survivors. Insurance companies have taken the basic insurance product, added other features, and turned life insurance into this conglomeration of life/death/financial product – lets simplify the matter.
Whole Life Insurance
Whole life insurance is marketed as insurance and savings plan all in one product. The idea behind whole life is that the owner has the same premiums for the duration of the policy (usually 30 years). Part of the premium goes to pay for insurance and part goes into a savings plan. At the end of 30 years the owner can let the accumulated cash continue to pay for the insurance, or they can cash out the policy, which terminates the death benefits.
1. Tax deferred savings
2. Borrow against savings
3. Use savings to pay premiums
And of course, you still have the death benefit. Sounds good, so what’s the downside? If we compare whole life to term, you will see that for the same monthly premium you can get lots more in the death benefit column.
Term insurance became popular in the 70′s. The knock against whole life was the commissions agents were getting. Insurance companies who started selling term insurance coined the phrase “buy term, invest the rest.”
What is term insurance? Basic term insurance is life insurance you rent or lease for a specific period of time. Lets say a man 25 wants $250,000 worth of insurance for 30 years. Take a look at some life insurance quotes online and you will see that a term policy may run him $30.00 a month, as compared to a whole life policy that can cost upwards of $150.00 – quite a difference.
It made sense. Buy a term policy where the death benefit could sufficiently take care of your spouse (in case of your death) and take the difference of $120.00 (difference between the two premiums) and invest it yourself. If you were diligent enough to do this you could easily out pace the returns in the whole life policy.
The key word is diligent, or maybe a better word is discipline. To successfully make term insurance work in your favor you need discipline.
What’s Best For You?
Term insurance is very attractive to younger people who need a bigger death benefit in case the primary bread earner passes early. Young families incur more debt in their first 15 years and need more coverage.
Whole life insurance appeals more to persons that don’t need that much life insurance and want a safe, tax deferred way to save.
When you venture into the marketplace you will find hybrids of the two life insurance products we reviewed here, don’t panic. Buy what you can afford; later, down the road you can reevaluate your coverage.